I’m an old school investor. In my mind, ETFs are professionally managed funds with a diverted portfolio.
But things are changing! Single-stock ETFs are here. They are the new hotness that came out last month, and as the name implies, they invest in a single stock, typically a large cap stock like TSLA, NVDA, WFC, BA, NKE, etc. There’s only a few out so far, but more are expected to be launched over the coming months. So are they worth it for your portfolio?
Single-stock ETFs utilize large amounts of derivatives to take a leveraged long or short position in just a single stock. So unlike, say, buying an ETF like QQQ which would give you the diversification benefits of the top 100 stocks in the Nasdaq, or the TQQQ ETF, which uses leverage to try to juice the returns (or losses) of QQQ, or the SQQQ ETF, which takes a levered short position in QQQ – rising as QQQ falls and falling as QQQ rises – a single-stock ETF provides the same leverage capabilities, but without the diversification that a regular ETF can provide.
Also: single-stock ETFs reset daily.
Considering the newness of these ETFs, it will be interesting to see how they work compared to already leveraged assets like options – and what benefits they provide that options don’t. They certainly would not absolve an investor from understanding the underlying stock or the volatility that the leverage can provide. Also not sure how liquid such ETFs will be going forward.
Jack Bogle (pioneer of index investing and the founder of Vanguard) warned that the over-specialization of ETFs could cause them to be a “trader to the cause” of passive indexing – and single-stock ETFs seem to be the biggest example of that.
To paraphrase Jamie Zawinski: Some investors, when facing the problem of diminishing returns (or losses) think “I know, I’ll use leverage”. Now they have two problems.
Caveat Emptor. Be careful out there.